What Is a Self-Employment Tax and How To Calculate It?

You know that you need to file self employment taxes, but you aren’t sure what they are or how to calculate them correctly. Many business professionals including freelancers, independent contractors, or small business owners can feel confused or overwhelmed by the process, which is where professional Tax Prep Services can provide clarity and accuracy. For self employed individuals, understanding tax rules is an essential part of managing finances and staying compliant. finances.

Where do you start as you’re preparing for tax season? We’ve created this guide to help you learn about self‑employment tax and things to consider as you’re calculating how much you owe. In many cases, estimated tax payments are necessary to avoid penalties throughout the tax year. Read on for all the information. Your tax liability will depend on your income, deductions, and other personal factors.

What Is Self-Employment Tax?

When you earn self-employed income, you still need to manage and pay taxes. And unlike traditional employment, taxes won’t be automatically deducted from each paycheck. That means there’s a bit more to manage to ensure you’re complying with tax regulations. A tax deduction for business expenses can lower your taxable income on Schedule C.

Self-employment tax, also called SE tax, is the U.S. federal tax consisting of Social Security taxes and Medicare taxes. While you will likely have to pay taxes if you earn self-employed income, the portion for self-employment is contributing to coverage under the Social Security system, such as retirement, disability, and Medicare coverage that you may use later in life. The social security portion of self‑employment tax helps fund your eventual social security benefits.

Why Do Self-Employed People Pay More Tax Than Employees?

The reason why self-employed people may end up needing to pay more than traditional employees is that you’re paying for the entirety of your Social Security and Medicare taxes. With traditional employment, the employer would pay half, and the employee would pay the other half. In contrast, sole proprietorships and similar structures must pay both the employee and employer portion of these taxes.

However, there are options available that help reduce the amount of self-employment tax you have to pay.

The main option is that the IRS allows you to deduct 50% of your self-employment tax from your gross income. That doesn’t completely make up the difference, but it reduces the federal taxes you have to pay. You may qualify for the earned income tax credit depending on your total income and filing status.

Additionally, you may be able to deduct ordinary and necessary business expenses to lower your net taxable income, and many self-employed people can take advantage of a Qualified Business Income (QBI) deduction of 20%. This can reduce the self employment tax amount and overall tax owed.

Who Needs To Pay Self-Employment Tax?

The IRS states that you need to pay self-employment taxes if your net earnings from self-employment are $400 or more. Common forms of self-employment that are subject to these taxes include: 

• Work as an independent contractor
• Freelance work
• Small business owners, including sole proprietors and members of a partnership
• Employees of a church that elected exemption from Social Security and Medicare taxes

Consulting with a tax professional can help if you aren’t sure if your earnings will qualify for self-employment tax, and to come up with a plan to manage this expense effectively. 

Is Self-Employment Tax 15% or 30%?

According to the IRS, the self-employment tax rate is 15.3% for 2025. That consists of two parts, 12.4% for social security and 2.9% for Medicare. 

In addition to that, you’ll also have to pay general income taxes and state taxes at a specific tax bracket based on your income. Therefore, self-employment tax is just one set of taxes you have to pay, and you’ll want to be setting aside more than that to cover all your tax expenses for the year. 

How Do You Calculate Self-Employment Tax?

It’s common to wonder how to calculate self-employment tax when you’re preparing to manage it during tax season. The process to calculate it goes as follows: 

• Calculate the sum of your total gross earnings from self-employment. 
• Multiply that amount by 92.35% to determine your net taxable income. 
• Multiply your net taxable income by 15.3% for Social Security and Medicare taxes. High earners may also need to add 0.9% more to that calculation for an extra Medicare tax expense. 

That deduction will get you to a rough estimated amount. However, you still need to account for any deductions you may have, which will vary from person to person. It’s a good idea to discuss it with a professional tax preparer to ensure you’re calculating everything correctly and making the right deductions based on your situation.  

Can I Use a Self-Employment Tax Calculator?

You can use a tax calculator to get a rough estimate of the amount of taxes you’ll owe. That said, not every calculator available online is accurate or updated based on the latest tax rates and regulations. Working with a qualified tax professional can help you make a more accurate estimate based on your situation and plan for tax expenses ahead of time. 

How Much Do I Set Aside for Self-Employment Taxes?

Generally, you’ll want to set aside 15.3% of your net taxable income to have enough money to pay for your self-employment taxes. As mentioned earlier, that’s just one portion of the taxes you’ll pay when you’re self-employed. In total, it’s often recommended to set aside 25-35% of your self-employment income to pay for all federal, income, and state taxes you may be subject to. 

If you expect to owe $1,000 or more in taxes at the end of the year, the IRS requires that you pay quarterly estimated taxes rather than paying one lump sum when you file your annual tax return. Quarterly payments are based on how much you expect to owe. Failure to make quarterly payments can result in having to pay a penalty. 

How Do You Pay Self-Employment Tax?

Most self-employed people will pay their taxes by making quarterly estimated payments throughout the year. Dates when quarterly payments are due are: 

• April 15th
• June 15th
• August 15th
• January 15th

The IRS offers several ways you can make payments, including using the IRS Direct Pay system, enrolling in the Electronic Federal Tax Payment System (EFTPS) for business taxes, mailing in a check or money order, or paying with a credit or debit card through a third-party payment processor. 

How Can Professional Tax Services Help?

Professional tax accounting services can make managing self-employment taxes much easier. Given that you have to calculate how much you owe, determine expenses you can deduct, and adhere to strict deadlines, it can feel like a lot to manage on your own. 

When you use our remote tax preparation services at Milestone, our team can help you at every step. Our team can act as a partner in the process to estimate tax expenses for the year, plan for quarterly payments, and optimize your tax situation as much as possible. It takes many tasks off your plate, so you can spend more time running your business. 

Additionally, we offer many other solutions, including accounting, bookkeeping, human resources, and fractional CFO services to ensure you have complete support for all your business needs throughout the year. 

Want to learn more about how our team at Milestone can help? Contact us today to learn more about our services and how we can help you file confidently during tax season.